Dive Brief:

• Amazon's Prime Day this week will be a "litmus test" for the e-commerce giant and the sustainability of digital retail's exponential sales growth, Moody's analysts led by Charlie O'Shea said in an emailed report this week.
• Amid the rapid shift to e-commerce during the COVID-19 pandemic, costs for Amazon are likely to "surge," with Moody's analysts estimating that fourth-quarter shipping expenses could reach $20 billion.
• Helping Amazon to fuel its growth this year is the "massive" $10 billion in new debt the company issued in June. The company has capacity to add debt to keep growing and still maintain its A2 rating given operating profit growth, according to the analysts.

Dive Insight:

The story of Amazon is largely one of dizzying growth. The company often tested the limits of its own capacity and ability to grow. 

This year brought an external jolt to Amazon's growth in the form of COVID-19. As shopping centers and nonessential store chains closed shop, consumers took to the internet to make purchases. Since stores reopened around the country, e-commerce growth has still remained well over 20% year over year as consumers still look to avoid stores and the possibility of contracting the new coronavirus.

The holidays are likely to bring more of the same, with many estimates anticipating 25% growth or higher in online shopping for the season.

Amazon has been racing to meet demand surges after experiencing "hiccups," in O'Shea's words, along the way. For nearly a month starting in mid-March, the retailer barred many products from its warehouses so it could focus on fulfilling household necessities and other key goods. The e-commerce giant also postponed Prime Day, its summer online sales bonanza, to October. 

Over the year, Amazon has tried to catch up to demand. In September, the company announced it was hiring 100,000 new full-time and part-time workers in its fulfillment operations, after hiring more than 130,000 earlier in the year. In Q2 alone, Amazon added roughly $5.6 billion year over year to its shipping costs, for a total of $13.7 billion. 

And there's no end to the growth in sight. Somehow Amazon will have to finance all that manic capacity building and shipping. As O'Shea wrote, "The ongoing pandemic crisis has made one thing clear: spending needs will continue to go through the roof as big online and retail incumbents adapt to this new normal."

Amazon isn't alone in any of this. Walmart and Target, among others, have also ramped up their digital and omnichannel capacity this year and have posted online sales growth at or near triple digits this year. The Moody's analysts describe it as a "race" for market share in online selling.

As Amazon tries to maintain and grow its market share, the retailer will no doubt keep spending. Depending on whether the company is willing to stomach a credit downgrade, which could raise its borrowing costs, the company could afford to finance and spend another $35 billion before its rating drops, according to Moody's.

The analysts also suggested that a multi-billion dollar brick-and-mortar acquisition or investment, similar to Amazon's $13.4 billion acquisition of Whole Foods, "might make sense to enhance its fulfillment capability."